What Is Weighted Average (in Valuation)?Definition and Examples

Weighted average earnings are the standard method business brokers and valuation analysts use to determine the earnings base for applying multiples. Rather than using a single year that may be anomalously high or low, weighting the most recent three to five years produces a smoothed figure that both buyer and seller can agree represents the sustainable earning power of the business. Most professionals use a 5-4-3-2-1 weighting scheme where the current year receives the highest weight.

When multiple valuation methods produce different results — as they almost always do — the weighted average reconciliation determines the final value conclusion. A valuation analyst might determine that the SDE multiple method yields $900,000, the EBITDA multiple method yields $1,100,000, and the DCF method yields $1,050,000. After assigning weights based on the reliability of each method for this particular business, the weighted average conclusion might be $1,020,000, which becomes the reported fair market value.

Business owners can use weighted average analysis to understand how their company's valuation trajectory is evolving. By calculating the weighted average SDE over the past three years and comparing it to the simple average, owners can see whether recent performance is pulling the valuation up or down. If the weighted average is significantly higher than the simple average, it suggests the business is on an upward trajectory that will attract premium multiples from buyers.